Now the Media Is Hooked on QE Crack

The markets have just finished putting in the best quarter since 1998. How do you know? All you had to do was flip on a television, pick up a paper or scroll internet headlines. The media has been abuzz with comparisons and ebullience that the rally was evidence that the economy is back. Unfortunately, the reality is that the outsized rally wasn’t driven by a robust economic recovery, stable employment, fiscal stability, a booming housing market or an innovation wave like we saw in 1998. None of those variables are present in today’s landscape. Instead, the recent surge in the markets was based upon the combined effects of liquidity injections from “Operation Twist” in the U.S. and the “Long Term Refinancing Operations” (LTRO) in Europe. With both of these liquidity injected highs now starting to recede the “addicts” are starting to look for their next hit.

Wall Street was hoping to get their next “dime bag” of liquidity infected goodness at the most recent Fed meeting. Unfortunately, Ben “The Dealer” Bernanke didn’t show and the symptoms of withdrawal immediately hit Wall Street. What is worse is that we now realize that it isn’t just Wall Street that is addicted to the Fed’s “crack” – somewhere along the way the media got hooked too.

As shown in the chart above the current correction is within the confines of the year to date advance. Furthermore, investors should welcome a correction which provides much safer entry points to invest capital into the equity markets. Corrections are a necessary part of a healthy and sustainable bull market advance. While normal market “buying stampedes” generally last for 17-25 trading sessions on average – the most recent was almost twice that long pushing most technical parameters to extremely overbought levels. A correction has been long overdue.